USD/TRY advances more than 5% to 5.60 on TRY sell-off

• Another hectic day around spot following the weak TRY.
• President Erdogan’s comments on rate cuts did not help TRY.
• Sunday local elections considered crucial for sentiment.

The Turkish Lira is now quickly losing part of the ground gained in past sessions and is pushing USD/TRY to fresh 3-day highs in the 5.60 neighbourhood, up more than 5% for the day.

USD/TRY up on Erdogan comments

TRY has intensified its depreciation today after President Erdogan advocated for lower interest rates, noting that a rate cut will help to tackle the inflation problem (?).

In addition, TRY is suffering another raise in the 5-year CDS (Credit Default Swap), a financial instrument that gauges the likeliness of a sovereign default. This adds to the already concerning sharp raise in the overnight swap rate (cost of borrowing TRY for foreign banks) to levels close to 1,000%.

In the meantime, Turkish FX reserves keep shrinking in response to central bank’s efforts to stem the weakness surrounding the currency, particularly before the key municipal elections due on Sunday. In fact, and according to the CBRT, reserves went down by TRY 13 billion last week, reaching a shocking TRY 45.1 billion so far this month.

What to look for around TRY

The Lira is expected to remain under pressure in the near to medium terms, always tracking the performance of the risk-associated complex and specifically around the EM FX universe. The next key event in Turkey will be the municipal elections (Sunday), considered crucial as the much-need structural reforms are expected to kick in soon afterwards. Furthermore, TRY will remain in the centre of the debate ahead of the elections, as unwelcomed weakness in the currency could prompt an emergency rate hike by the CBRT. This scenario will surely collide with Erdogan’s intentions of lower rates and undermine at the same time the efforts of the economy to recover from the current recession.

USD/TRY key levels

At the moment the pair is gaining 4.77% at 5.5729 and faces the next hurdle at 5.6371 (high Jan.3) seconded by 5.8413 (2019 high Mar.22) and finally 5.8707 (high Oct.23 2018). On the downside, a break below 5.3500 (55-day SMA) would expose 5.2918 (low Mar.26) and then 5.1594 (2019 low Jan.31).